Thursday, November 26, 2015

Need money to pay bills? Raiding your 401(k) is not a good idea

Need money to pay bills?
Raiding your 401(k) is not a good idea

When
you're short of cash, raiding your 401(k) plan may seem like a good idea. Here
are two reasons why it isn't.

Penalties and taxes. If you're
not at least 59½ years old, you'll be hit with a 10% penalty for early
withdrawals except in certain limited cases, and the money you withdraw will be
taxed at your regular tax rate.

Lost opportunity. If your
401(k) earns an annual return of 5% over the next 30 years, an account with a
balance of $50,000 could grow to over $215,000. A withdrawal taken and spent
today will cost you that growth.

Bottom
line: If possible, find other ways to pay your bills, even if that means
contributing less to your 401(k) in the short term. While it's wise to match
funds your company provides, you might consider temporarily reducing
contributions that exceed the matching amount.

What
about loans? A 401(k) loan also has drawbacks. Again, money that's not in your
account won't grow. In addition, if you lose your job, you'll have to repay the
outstanding loan balance or face tax penalties.